Tiffany has decided to sell direct in Japan as opposed to selling wholesale to Mitsukoshi and Mitsukoshi selling to the public. In this agreement Tiffany will give Mitsukoshi 27% of net retail sales in exchange for providing the boutique facilities, sales staff, collection of receivables, and security for store inventory. This new agreement exposes Tiffany to the fluctuation in the yen-dollar exchange rate. Therefore, they are considering two basic hedging alternatives to reduce exchange-rate risk on their yen cash flows. The first alternative was to sell yen for dollars at a predetermined price in the future using a forward contract. The second alternative was to purchase a yen put option allowing them to exercise their option only if it was more profitable in the future at the future spot rate. Two more alternatives that we think are appropriate are a synthetic forward using options and a synthetic forward using interest rate parity. Furthermore, Tiffany needs to understand the hedging alternatives and determine what, if any, strategy is right for them.

1.In what ways is Tiffany exposed to exchange-rate risk subsequent to its new distribution agreement with Mitsikoshi? How serious are these risks?

Tiffany is exposed to foreign exchange risk by selling directly to the Japanese market. When they sold wholesale to Mitsukoshi, Mitsukoshi bore all the foreign exchange risk. Under this new agreement Tiffany is now exposed to the volatile fluctuations in the yen-dollar exchange rate. Since Tiffany is making profits in yen they have to convert the yen to dollars to take back to their home country. Since the yen is thought to be overvalued in comparison to the dollar, the future exchange rate can decrease Tiffany's profits. Also, the extreme volatility in the exchange rate creates significant uncertainty in what the future exchange rate and profits will be if left unhedged. The most important foreign exchange risk facing Tiffany is the operating exposure risk. The other types of foreign exchange risk to be taken into consideration in order of importance are transaction and translation risk. Operating exposure - is created by changes in the amount of future operating cash flows caused by an exchange rate change. This is the most important source of future exchange risks and is difficult to hedge. Exchange gains or losses are determined by changes in the firm's future competitive position and are real. This risk impacts revenues and the costs associated with future sales and should be looked at long term. Therefore, Tiffany is exposed to this risk; if the yen depreciates against the dollar, Tiffany's will receive fewer dollars. Transaction exposure - results from existing contracts that are binding future foreign currency-denominated cash flows and creates a risk to the net present value of the contracts. Tiffany is exposed to this risk because they have agreed to reverse $115 million in sales. Only $52.5 million in inventory was repurchased from Mitsukoshi in July 1993. Mitsukoshi agreed to accept a deferred payment of $25 million to be paid in yen quarterly over the next 4.5 years. The remaining inventory will be repurchased throughout February 1998. Translation risk - is created by changes in income statement items and book value of assets and liabilities caused by changes in the exchange rate. This risk relates to past activities which already appear on the balance sheet and income statement, therefore this type of risk is not serious because it does not affect Tiffany's distribution agreement with Mitsukoshi.

Tiffany should actively manage its yen-dollar exchange risk. Tiffany knows they will have a substantial amount of yen cash inflows from their new arrangement of selling direct in Japan. If Tiffany does not hedge this currency exchange risk then their earnings will fluctuate....

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...way(s) is Tiffany exposed to exchange-rate risk subsequent to its new distribution agreement with Mitsukoshi? How serious are these risks?
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1) Transaction Exposure, the probability of loss associated with a business transaction denominated in a foreign currency, due to changes in the exchange rate .
2) Operating exposure is the degree of risk that a company is exposed to when there is some type of change in varying currency values that are relevant to the operation of the company.
Tiffany is exposed to foreign exchange risk by selling directly to the Japanese market. The extreme volatility in the exchange rate creates significant uncertainty in what the future exchange rate and profits will be if left unprotected. It is the unpredictable foreign exchange rate fluctuations that pose a serious risk in the Tiffanycase. Classic behavior of the Yen/Dollar exchange rate over the years has proven to be volatile. Even when we look at the data for a six month period, April through September, the exchange rates fluctuated as much as 10%, (from 133.30 Yen/$ to 120.07 Yen/$). {Exhibit 6}
Assuming that all costs incurred in $ dollars and prices for consumers remains the same, the 10% fluctuation as we see during this 6 month period, translated into dollars, represents a third of a reduction in the net results. ($25 mln -/- $75 mln x 10%) to $16.67mln. Tiffany is making profits in Yen they have to convert the...

...Table of Contents
1. In what way(s) is Tiffany exposed to exchange-rate risk subsequent to its new distribution agreement with Mitsukoshi? How serious are these risks?
2. Should Tiffany actively manage its yen-dollar exchange rate risk? Why or why not?
3. If Tiffany were to manage exchange rate risk activity, what should be the objectives of such a program? Specifically, what exposures should be actively managed? How much of these exposures should be covered, and for how long?
4. As instruments for risk management, what are the chief differences of foreign exchange options and forwards or futures contracts? What are the advantages and disadvantages of each? Which, if either, of these types of instruments would be most appropriate for Tiffany to use if it chose to manage the exchange-rate risk?
Question 1: In what way(s) is Tiffany exposed to exchange-rate risk subsequent to its new distribution agreement with Mitsukoshi? How serious are these risks?
Exchange rate risk relates to the effect of unexpected exchange rate changes on the value of the firm. Tiffany & Company are exposed to exchange-rate risk subsequent to its new distribution arrangement with Mitsukoshi due to the fluctuating exchange rate. Yen is usually more volatile and tends to fluctuate in the same direction as the dollar. Yen is also overvalued and could depreciate resulting in...

...Strategic Problems Statement
Growth without compromise strategy has been the Tiffany & Company culture since it was first established which contributed to its long success. However, in the recent years the company has been suffering from a declination of their sales and they are facing a dilemma between maintaining company reputation and culture with the vision of the main shareholder of the company.
Issues Identification
Issue 1
Declination of sales.
Issue 2
The conflict between shareholders and company management decision of to which path Tiffany should take. The shareholders want Tiffany to rapidly grow and move forward in order to generate more profitable revenue by suggesting options that goes against Tiffany Growth without compromise strategy.
Issue 3
Tiffany is considering licensing its brand to a product that is not the company’s core competencies and opening new shops faster. The issue here is that Tiffany is going against its growth strategy this might dilute the company.
Issue 4
The company’s vertical integration strategy has been costing the company a lot of investment.
Issue 5
Separating Iridesse from Tiffany management. The problem here is that leaving an inexperienced firm running on its own may cause issues if not supervising.
Solutions
Issue 1
Set 1:
Continue the opening of new stores in South East Asia’s...

...Tiffany’s Little Blue Box: Does It Have Any Strategic Significance?
What are the company's vision/mission and objectives?
Vision statement: “Tiffany & Co. collaborates with other forward-looking leaders in the jewelry industry and with nongovernmental organizations in order to positively influence the entire jewelry supply chain”.
Mission Statement: “ to be the world’s most respected jeweler”.
Objectives: To was to remain one of the top higher quality players along with companies like Bulgari and Cartier.
Marketing Strategy
Targets the more affluent population and still maintains their no haggling policy, something which dates back to the original store.
Business Strategy
Strict hiring standards, every employee must compete six to eight weeks of training in knowledge, skills, and product training, as well as pass a written test before they are allowed to meet customers and work on the Tiffany & Co. sales floor.
Foreign Markets
The company has expanded its stores international locations, Europe and the Asia-Pacific.
SWOT Analysis
Strengths
• Strong Direct Selling Strategy
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...TiffanyCase Study
Introduction
Tiffany was founded in September 18, 1837 and for about 170 years, the brand has been successfully opening several stores and establishing the brand as the top place to buy fine jewelry of high quality. The brand has been dedicated to provide their customers with original designs as well as the ultimate in-store experience. They know that their customers expect nothing less than top quality in jewelry and services and Tiffany’s has done just that for the past fifty-three years when Charles Lewis bought the company and named it as Tiffany & Company.
The company mission and values evolves more than creating fine, high quality jewelry, in fact the company believes that their products are treasures that will be kept in people’s family for generations to come. To gain customers loyalty, Tiffany & Co invests in quality, excellence and trust. CEO Mike Kowalski affirms that most of its Tiffany & Co success comes from their philosophy that the company has an obligation regarding its products quality and has never been elitist.
In fact the company claims to always have had democratic stores in which everyone is allowed inside, there are no doorman or locked doors. The company translates humility in recognizing that Tiffany & Co is an American Brand and for that is part of its country...

...Critical summary
Tiffany and Company is one of the leading U.S. luxury jewelry brands, and their telltale “little blue box” has become a coveted item by women everywhere. Tiffany & Co. was founded in 1837 by Charles Tiffany and John Young and has grown to generate more then $2.6 billion in revenue through their 167 global retail outlets. The growth strategy that has seen them through their long reign is “growth without compromise”. In 2007, due to objections from their largest shareholder, Tiffany began looking at strategies to increase shareholder value. Two options were presented; opening new stores at a faster rate, and licensing Tiffany to an established Italian fashion-eyewear manufacturer/distributer.
The ownership of Tiffany & Co. has changed four times in the last 160 years; Walter Hoving bought the company from the Tiffany family in 1965, Avon purchased the company in 1979, and in 1984, Avon sold Tiffany for $135 million to investors who took the company public in 1987. Since going public, the value of Tiffany has grown from $135 million to $4.4 billion.
There are 3 channels of distribution that Tiffany & Co. uses to sell their products; U.S. retail stores, which account for 51% of sales, International retail stores, which account for 38% of sales, and Internet/catalogues,...

...TiffanyCase
Amy Simmons
Regis University
With the recent restructure of Tiffany Japan, the profits earned by our Japanese division are now exposed to foreign exchange risks that were previously not a concern. In light of this new exposure, it has become imperative that we needed to determine whether or not Tiffany should implement a risk management program using financial derivatives to hedge against this risk.
The first step in this evaluation was to determine the amount of profits that could be at risk. To do this, a pro forma income statement (see Table 2.1) was constructed for the remaining fiscal quarters of 1993. The income has been estimated by applying the previous years’ seasonality to Tiffany’s one percent market share of Japan’s $20 billion jewelry market. All expenses and other income with the exception of selling, general and administrative (SG&A) and provision for tax expenses were estimated using a trend analysis between fiscal years ended January 31, 1992 and 1993. SG&A expenses were calculated using the 27% agreed upon expense with Mitsukoshi for providing boutique facilities, sales staff, collection of receivable, and security for store inventory. Whereas, the taxes having seen a large drop between 1993 and 1993, were conservatively estimated using an average percentage between the two years. Using this method of profit estimation, it has been determined that the...

...Tiffany & Co.
Overview
Tiffany & Co. is a retailer, designer, manufacturer, and distributor of luxury fine jewelry. As of January 31st, 2003, they had 44 company-operated stores within US borders and 82 company-operated stores internationally. Fine jewelry makes up 79% of their net sales followed by other products such as timepieces, stationery, and sterling silverware. Michael J. Kowalski, Tiffany &Co.’s current CEO, has the same mission the company had when it first started in 1837: to be the world’s premier luxury brand of fine jewelry as well as America’s house of design.
S.W.O.T.
Tiffany & Co. has done an outstanding job in developing a strong brand name, which represents nothing but the best, most durable, and most luxurious jewelry. Part of their strong reputation can be accredited to their company-operated stores, which quickly differentiate Tiffany & Co. from competitors who sell their products through other distributors. The company-operated stores strengthen the brand name even more by physically isolating Tiffany’s name and its products, giving them a prestigious image. Tiffany & Co.’s advertising campaigns have done a good job in targeting their ideal upper to middle class customer. Their ads have been strategically placed in newspapers such as The New York Times and...